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Commodities Backwardation Jumps on Russia-Ukraine Escalation

Commodities Backwardation Jumps on Russia-Ukraine Escalation

Commodities are being priced near their highest premium on record to deliveries one year ahead, a measure known as backwardation that reflects how physical supplies of everything from oil to corn remain tight amid booming demand and rising geopolitical tensions. 

The 23 energy, raw-material and crop futures that make up the Bloomberg Commodity Index were about 6% higher than their one-year forward contracts at the close on Wednesday, according to Bloomberg calculations. That’s higher than any month-end backwardation rate in at least 15 years.

While the reopening of major economies from lockdowns unleashed pent-up demand for transportation fuel and materials used in manufacturing, new mining and oil developments stalled and bad weather hurt crops. To make matters worse, Europe went through an unprecedented energy crisis this winter, and now the Russia-Ukraine tensions are clouding the outlook for oil, gas and wheat supplies from the two nations. 

In raw-material markets, futures are typically pricier at longer maturities because those reflect the cost of carrying inventories over time as well as future demand expectations -- a structure known as contango. But when markets fear scarcity and demand for products is urgent, they flip into backwardation.

Commodities Backwardation Jumps on Russia-Ukraine Escalation

That’s been the case for most raw materials in the Bloomberg Commodity Index since the second half of 2020, when the economy started rebounding from the pandemic while supplies were still mostly constrained. Since then, the spread over longer-dated futures has widened as prices for those commodities surged, fueling the highest U.S. inflation in four decades. 

Commodities as a group hadn’t been in backwardation for such a long time since at least 2007. 

Front-month deliveries for commodities such as crude oil, natural gas, corn, soybean, sugar, coffee and copper are all currently trading at premiums to longer-term contracts.

©2022 Bloomberg L.P.